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Technology Stocks : America On-Line (AOL)
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To: RocketMan who wrote (4515)2/7/1999 1:29:00 PM
From: Chuzzlewit  Read Replies (1) of 41369
 
RocketMan, there are a couple of assumptions implicit in TA beyond the simplistic observation that TA assumes that there is memory in price volume time series.

The first is that the market must be very inefficient. This is another way of saying that news spreads very slowly through the investing community. The behavior of AOL stands in stark contrast to this assumption. You don't need to be a rocket scientist (like yourself) to figure out that the spurt in prices from the $112 range to the $140 range was closely tied to the inclusion of AOL in the S&P500. Nor should it have come as a shock to investors that AOL dropped $5 on the announcement of the purchase of MovieFon. The behavior of the stock suggests very efficient market behavior.

The second inference is that there are kinds of diseases (for want of a better term) that slowly spread through the investing community. But this is a strange kind of explanation, because if we assume that investors basically come in three flavors it is hard for me to come up with an external explanation of the behavior momentum players feel they can capitalize on. For example, let's assume that the investing community consists of buy and holders (lazy investors like me), fundamentalists (fund managers), and traders. So who exactly is responsible for this lemming-like behavior? Certainly not the buy and holder (he is off reading a great novel like Martin Chuzzlewit), the fundamentalist tends to act instantaneously to news (he is often responsible for gap up and gap down openings). That leaves the trader. Now it can't be the day trader, because all he does is add liquidity to the market. So is the implication that position traders and momentum guys are entirely responsible for this behavior. If so, aren't we really suggesting that they play a zero sum game amongst themselves?

One final thought: if playing trends were so lucrative, then why is it that passively managed funds consistently out-perform passively managed funds?

TTFN,
CTC
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